Security, social and otherwise

What boots it at one gate to make defence,
And at another to let in the foe?

John Milton, Samson Agonistes, Lines 559-60.

My grandfather on my mother's side worked in small-town New England factories for more than forty years after he returned from World War II.  It was precise machine work, carefully done, and it paid relatively well for the town and the job.  But there never was much for him to save.  He retired at 65, drawing a small pension. 

His savings went kaput long ago. He needs his Social Security checks.  There's not much to those checks, however; by the end of some months, he has nothing.  It has become something of a game for my parents to trick him into taking their money.  Day to day, week to week is how he lives on the government checks, in a rusting Quonset hut -- a relic of the war that opened his adult life. 

Social Security is not yet in crisis; credit Drum and DeLong for finally convincing me.  It can continue in its present form for at least a decade, and likely much longer.  But that does not mean that it should.  The lack of a crisis is not evidence of success. 

My grandfather, after all, is not alone.  A person born in 1925 who worked for forty years and retired at age 65 at a decent wage ($40,000) receives just under $19,000 in benefits per year today.  This is not a sum on which one lives the high life.  Indeed, it's barely getting by -- if it's getting by -- in most of the higher-priced places in the land. 

Moreover, the money that our hypothetical retiree receives is not the fruit of an investment.  It was not once used to build a factory or buy a new computer or train a new worker or start a company.  It was not put into some business, did not grow by the effort of others, and will never pay dividends.  It's a simple transfer, a from-here-to-there wire transmission, doing no work along the way.

We need to stop shuffling checks from person to person in a generational trading game of IOUs and paid-in expectations.  We need to build a system in which retirees own something -- a stock, a bond, a piece of their former employer -- that is theirs, rather than relying upon the passing benevolence of the voters.  And, better, a system in which the money paid in actually does something -- creates a job, builds a factory, starts a company -- that benefits us all.  An ownership society, the Das Kapital dream refitted for capitalist clothes, in which the workers do own the means of production.     

Privatizing Social Security will entail risks.  I will be the first to admit that it can be done poorly and that it will not cure all ills.  There are no silver bullets in this gun. 

But that's part of the point.  The present system is no silver bullet, no too fine thing.  Indeed, judged by the standards to which some hold privatization, the present system is an abject failure.  Thus, the fact that privatization is also not a silver bullet is hardly a knock against privatization.

The question to ask is whether privatizing a portion of Social Security has the potential to be better than the current system.  Frame the question that way -- the correct way -- and then let's have the debate.

UPDATE:  Jeremy Osner makes the following observation, which is echoed by several others in the thread:

But: advocates of ownership need to recognize that if you own something, there is a possibility that it will lose its value. Ownership entails risk; social security means a level of risklessness.

Sebastian Holsclaw (who ultimately disagrees with me, it should be noted) makes the point well in the thread, but it bears being made upfront:  All forms of Social Security are risky.  A significant, long term market failure will cause a private system to fail, the current  system to fail, and any conceivable new system to fail.  The asteroid strike won't care about the color of your parachute -- to mix metaphor and cliche'. 

It is important to remember that, over the long term, the modern stock market has always shown significant aggregate returns.  Even for the 30-year period from January 1, 1929 until January 1, 1959 -- a period that encompassed the Great Depression and a World War, among other things -- stocks were a good bet (graph of S&P 500):

There is no reason to believe that the future will significantly differ.  Or, put another way, if the future does significantly differ, it won't much matter what we do to Social Security.

Comments

[Dantheman]

"The question to ask is whether privatizing a portion of Social Security has the potential to be better than the current system. Frame the question that way -- the correct way -- and then let's have the debate."

Has the potential?!?! Are you seriously suggesting we should privatize so long as the best case scenario (and not something below median outcome, as it is an insurance program) is at least as good as the current system?

[Jeremy Osner]

Having retirees "own something" is a fine goal and well-stated. But: advocates of ownership need to recognize that if you own something, there is a possibility that it will lose its value. Ownership entails risk; social security means a level of risklessness. I think social security is functioning very well in the case of your grandfather -- it is providing a base level of subsistence for someone who was not paid well enough during his working life to put much savings away. Consider the alternative -- if your grandfather had no savings and no monthly check -- I think he would be worse off. If he had a stock portfolio equal to his social security contributions over the years, he would likely be better off than he is now; but there is a chance he would be worse off.

[Edward]

The faith many Americans have in the stock market is surely one of the reasons for its overall success. But what many of those fine people don't understand is that many other Americans, myself included, don't have a head for that sort of thing. Truly, I'm nearly phobic when it comes to investing, and watching many of my friends lose untold thousands when the tech bubble burst, reinforced my belief that it's gambling, and you do not gamble with money you cannot afford to lose.

Privatization to me is gambling with our future. It's reckless for those who actually have a head for investments, but it's simply incomprehensible for many of us who don't. I know Bush is proposing a solution that allows those stockaphobic Americans like myself to keep our money in SS, but I'm not at all convinced the real goal isn't to dismantle it altogether, so that during the period when other Americans are switching over to private accounts, but I'm still paying into SS, my money may simply evaporate once the New-Deal-haters finally get their way.

Silly on the face of it to those who trust the markets, I'm sure...but nothing anyone is saying on this topics does anything to alleviate my fears.

[LizardBreath]

Your problem with Social Security as it exists now is, at least partially, that it doesn't pay your grandfather enough money to live in dignity. Any version of privatization that changes social security from a defined benefit to a defined contribution plan, or shrinks the value of the defined benefit, will leave some non-negligable percentage of people like your grandfather with even less than he receives now. The 'equity premium' that privatization fans rely on is a premium for risk, and what risk means is that of a large population that takes a given risk, it will turn out badly for a class of that population.

The correct way to frame the question is "Is the possibility that benefits might increase for some worth the certainty that they will decrease for many?"

[Sebastian Holsclaw]

The key problem with privatization is "What do we do with people whose 'something' loses value." For people my age, the ups and downs will almost certainly be worth quite an up by the time I retire. That isn't so obvious for a 50 year old. Also we need to manage expectations about 'loss'. If over ten years there is a 100% gain, but in the last year before retirement there is a 20% loss, it is quite possible that the end point is perfectly workable. But when that happens you are still going to have many of the retirees in that year agitating about the unfairness of the 20% loss. I'm not totally convinced that privatization is good because on average it is great, but the ugly outliers are going to get all the political attention. If we can manage that (both in the result of the outliers and in the perception problem they can create) it could be workable. But the perception issue may be nearly insurmountable. And it could have the really bad effect of discrediting the market in the general public.

[Bernard Yomtov]

von,

I think you are operating under a misconception when you talk about how SS is simply a transfer and how we need a system

"in which the money paid in actually does something -- creates a job, builds a factory, starts a company -- that benefits us all."

SS is a transfer, but an investment-based system would in effect be the same. The saved money, deducted from paychecks, would be invested, but the benefits would then have to be paid by liquidating existing investments, by disinvesting. Simplifying a good bit, we would just have retirees selling their investments to workers, who would sell them in turn, etc.

[Edward]

Further on that point, Sebastian, for myself I was furious when I lost money when the tech bubble burst. It was irrational, I know, but it seemed so unfair. I'm an extremely cautious investor, I didn't deserve to lose out. Imagine being 70 and seeing a dip in the markets drastically alter your planned retirement lifestyle, and having younger folks just shrug and tell you, "that's the market"...you'll see lots of seniors with guns storming government offices, I suspect.

[hilzoy]

von: I would be against privatizing Social security in general, because of the risks to individuals, because of the need to get fairly high returns to offset increased administrative costs, and because of (what I think would be) inevitable pressures to let people draw down, or borrow against, their savings for various worthy purposes (buying a home, education), which could destroy the whole thing.

However, I am much more against it right now than I am in the abstract. Right now we have a huge deficit. The transition costs to privatization are in the trillions of dollars. These trillions get added on to the deficit, and if you're concerned not with whether your grandfather's SS check (in particular) is used for investment, but with the availability of money for investment in general, then it seems to me that increasing the deficit by such a huge amount would involve costs to our ability to invest that would greatly outweigh the benefits of your grandfather's money being invested. The deficit would be less of an issue if we had not just spent the last four years having some of the most irresponsible fiscal policy in our history, but as of now, it is.

If we want to increase money for investment, the best thing we could do would be to get serious about the deficit. Given the transition costs, privatizing Social Security is not a way to do this.

[von]

I'll get to as many comments as I can in a few moments, but with respect to Bernard:

SS is a transfer, but an investment-based system would in effect be the same. The saved money, deducted from paychecks, would be invested, but the benefits would then have to be paid by liquidating existing investments, by disinvesting.

The issue is what happens to the "invested" money during the period that it is "invested." There's a significant difference between generational transfers and a series of investments over 40+ years -- even though the investments will eventually be liquidated.

[von]

Note also two things: (a) I'm not proposing such a radical redesign for workers who are within 20 years of retirement (Sebastian's and Edward's points about the volitility of the markets are absolutely correct, here); and, (b) Keep in mind that I support a partial privatization plan. Some level of benefits would be guaranteed.

[von]

"volitility"

Erm, "volatility."

[Sebastian Holsclaw]

"Truly, I'm nearly phobic when it comes to investing, and watching many of my friends lose untold thousands when the tech bubble burst, reinforced my belief that it's gambling, and you do not gamble with money you cannot afford to lose."

Ah, but how much did they gain first? A number of friends are very whiney about their tech bubble losses, but their overall gains in the 1990s still give them an overall average return per year of 9 to 10%. To put that in perspective if you invested $100 per year at 9% average return, you would have around $1,656 on your $1,000 investment over ten years. That isn't bad at all. If the tech bubble hadn't burst they might have had average returns of 20%+. Moaning about how you miss that is silly. My 401k is making about 18% right now, and I fully expect it won't make any where near that much over the full term.

[kenB]

von -- if your main complaint is that the money isn't invested, then that could be addressed by having the government invest the money in the market, no? Privatization is a separate issue, I think, having more to do with individual liberty than money management.

[hilzoy]

On rereading my comment, I found a mistake: when I said: "if you're concerned not with whether your grandfather's SS check (in particular) is used for investment...", what I meant was: whether your grandfather's check (in particular) is derived from money that has been invested. Obviously, your grandfather is using his check to live on.

[Jill]

Assuming that the stock market will always go up is like believing in a pyramid game. Our economic future is not bright. We have to face the enormous global economic dislocations caused by the end of the oil based economy and global warming. Our current administration refuses to face or deal with either problem, perhaps because they think the Rapture will solve everything.
Also many people don't have the knowhow (like me) to manage stocks, bands, mutual funds ets. For them a reliable check is exactly the foundation for a retirement that they want and need. It is a mistake to impose one's values on other people. "Owning something" (meaning a stock) might be Sebastian's goal, but it isn't an inherently superior goal to prefering a check.
also I don't see how there is something to own in a stock, bond or mutual fund. They go up and down in value and could simply disappear. So what does a stock holder own? A piece of paper. by the way I have about 170,000 in stocks so I'm not an anti-stock fanatic. But my retirement is based on owning something real--my house which will be paid for free and clear, thus reducing my overhead to the point that I will be able to live comfortably and modestly on parttime work until Social Security and my pathetic teacher retirements kick in.
I do have a personal interest in this. I have been paying into SS for forty some years and I am expecting to get something worthwhile back in fifteen years or so. So it pisses me off on a truely visceral level that rich (inherited, not earned) people like Bush have decided to change the rules in a way that screws me. And claim to be promoting responisibility while they do it! Please don't take this as an attack on you, Sebastian. I've come to the conclusion that you are naive. It's the Repub leadership that is untrustworthy.
The "owning something, responisbility society' thing is seductive but it only works for people who like reading the Wall Street Journal and have a head for that kind of thing. And a blind faith that their stocks will go up as the ecology of the oceans crashes.

[Bernard Yomtov]

von,

How are you going to pay benefits today if all the payroll money is being invested? The answer is that you are going to liquidate investments.

Your logic would be correct if there were no retirees today, but even then it would cease being correct as soon as benefits being withdrawn exceeded investments being made.

Sebastian,

WIth respect to your outliers, I think you underestimate the size of the problem. First, remember that when the market loses 20-30% over a period of year or two it affects an entire cohort around the retirement age, not just an unlucky portion. This has the potential to be a major political problem.

Second, the risks are worse than I think is generally realized. Take your example above of 100% over ten years followed by a 20% loss. A doubling over 10 years represents just about 7.2% a year return. Follow that with a 20% loss and you reduce the annual return over eleven years to about 4.4%.

But it's worse than that. In general annual contributions to the retirement plan will increase over time, as workers get raises, promotions, etc. If we assume that the size of the contribution goes up by 5% a year over the eleven years then a 20% drop in the last year reduces the annual rate to about 2.1%. A 30% drop makes it negative. It does not help to suggest that those nearing retirement should move their assets to more conservative investments, since that simply shifts the risk in time, rather than eliminating it.

[votermom]

if your main complaint is that the money isn't invested, then that could be addressed by having the government invest the money in the market,

Exactly. Thanks for posting that.

[Sebastian Holsclaw]

"Assuming that the stock market will always go up is like believing in a pyramid game. Our economic future is not bright. We have to face the enormous global economic dislocations caused by the end of the oil based economy and global warming."

If it is true that we have a dim economic future, people's retirements aren't going to be secured by Social Security. There is an interesting paradox which reveals how illogical the Social Security debate is. For most scenarios where the economy tanks, and people couldn't have relied on investments, there is going to be a serious budget crunch which will hit Social Security as well. For most scenarios where the economy does really well, almost any plan will work. There is a narrow band of outcomes where privatization will work better than Social Security and another (closely related) band of outcomes where Social Security will work better. But for a vast number of outcomes (many of them fairly likely) either plan will work, or neither will work.

I'm skeptical of privatization because I believe that the market will outproduce on average, but that the statistical outliers will cause a huge political problem.

[rilkefan]

Funny, clear, right.

[LizardBreath]

This is a little off-topic, but is that really a valid use of "statistical outliers"? I've always understood it to refer to data points that are so anomalous that including them in a dataset will render calculated statistics misleading. You're talking about outcomes that will affect a substantial percentage of retirees, not a few freak cases here and there.

[praktike]

Why is it my fault that your grandfather blows his wad each month on booze and hookers?

[Sebastian Holsclaw]

LizardBreath, I suppose the proper term would be closer to 'tail-end of the curve'. Hmm, I know there is a term for what I'm trying to describe, but for the life of me I can't remember it. (Thank God my life isn't on the line). The point I am trying to make is that on average I am fairly sure that privatization would do much better than the current return. But 'on average' includes some people who would lose lots of money. That would cause a noticeable political problem even if the policy was good for the country as a whole.

Bernard, what is the history like? Doesn't the 8% average return historically include the big drops? Without them the percentage would be much higher. (In other words, your criticism of the out-of-my-ass thought is correct but I am wondering how it would look on a 30 or 40 year history.)

[Bernard Yomtov]

Sebastian,

I'll have to look up the history. I'm not really sure how the real returns that are widely cited are calculated, though they should certainly include the big drops.

What they do not allow for is the fact that investors will have varying amounts invested at different times. That is, citing the results of an 8% or whatever annual return over a long period assumes that you start with a portfolio and do not add to it over time (except from its own gains). That is not what happens in an investment based retirement system.

[Dave M]

Two quick comments. First, I appreciate the honesty in this post; I think your approach to the topic is much more fair than most we will hear in the next year. Second, I think you are still asking the wrong questions. There are obviously many tax-favored savings programs, from 401ks to IRAs - the real problem is if the payroll tax is so high that it dissuades people from using those programs. If it is too high, the problem then becomes how we deal with that, what is in effect too high a reactionary tax. Alternatively, if it is not the proximate cause of inadequate retirement finances, we must work on developing different solutions.

We already have decent mechanisms for private savings - to deal with the situation honestly, we must ask how much those mechanisms are in conflict with social security. I would suggest not much, or at least no more than any other necessary expense.

[Lynne]

I have a hard time with investing this safety net with corporations, mostly because so many of them seem to be run with CEOs who have Ken Lay ethics.

[von]

I've attempted to address several of the comments in an update. As for the others that remain (sorry if I missed someone), I hope to have a second, "proposal" post in the future. In brief, however:

LizardBreath and Sebastian both raise concerns regarding the "unfortunate outlier": That is, the individual who, through bad luck or poor choices (or, most likely, some combination of the two), ends up losing a significant portion of his investment. I don't dispute that this will occur; what I can offer are three mitigating factors:

1. At least in the beginning, some part of the SS program should remain as a guaranteed benefit, albeit subject (to my way of thinking) to means testing. No one will "lose everything."

2. At least at the beginning, investment options will be limited. I foresee a system in which investors are offered the possibility of choosing between several broadly-based stock and bond index funds. This will not only reduce risk to the investor, but will also reduce management fees. (As a worker's investments increase, I think it wise to free up some percentage of the individual to other investments -- including individual stocks.)

3. In all events, Welfare and Medicare payments from the general fund should remain available for the truly unlucky and/or needy.

How are you going to pay benefits today if all the payroll money is being invested? The answer is that you are going to liquidate investments.

There will need to be a transition period, Bernard. The present system will remain in place for current retirees and those whose retirement horizon is short. (Hopefully, this answers Jill's concern as well.)

With respect to the following suggestion by KenB and Votermom:

if your main complaint is that the money isn't invested, then that could be addressed by having the government invest the money in the market,

It's true that investment will pay dividends -- both literal and figurative -- such that almost any form of investment is likely to be preferrable to the current system. But the point of individual retirement accounts is to put worker's retirement funds in their hands, and to allow them to be (some for the first time) shareholders and owners of society. This is not merely about doing the financially prudent thing, but doing the financially empowering thing.

In addition, a government-controlled investment fund will make the government a significant shareholder in business, making business a government client. Such an arrangement has not been, historically, a very good idea.

There are obviously many tax-favored savings programs, from 401ks to IRAs - the real problem is if the payroll tax is so high that it dissuades people from using those programs.

Doug M., you're asking a pertinent question, but I fear we're talking past each other. I'm talking about turning a significant portion of the payroll tax into an investment -- which increases the savings rate, benefits current workers, and benefits the economy as a whole. (In contrast, it should be noted, to the tax it replaces.)

[von]

I have a hard time with investing this safety net with corporations, mostly because so many of them seem to be run with CEOs who have Ken Lay ethics.

I'd dispute that, Lynne. The reason why an "Enron" event is so shocking is that it almost never happens. The market is a terrible punisher of many bad actors.*

von

*I'm not contending that the market necessarily accounts for corporations that commit bad "external" acts -- pollutions, etc. -- so don't read this statement overbroadly.

[Dantheman]

"Even for the 30-year period from January 1, 1929 until January 1, 1959 -- a period that encompassed the Great Depression and a World War, among other things -- stocks were a good bet"

And as your graph shows, after the first 25 of those years, stocks had no gain at all. A person whose prime savings years were those 25 would have no gains to show for his investment.

[praktike]

I'm deeply offended that my brilliant and insightful comment received no response.

[von]

But the point of individual retirement accounts is to put worker's retirement funds in their hands, and to allow them to be (some for the first time) shareholders and owners of society.

I should also note that I'd want me to be in control of my finances -- not some faceless government worker -- and I can't think that I'm in the minority on that.

[Dantheman]

praktile,

Me too, and mine was the first.

[von]

person whose prime savings years were those 25 would have no gains to show for his investment.

No, Dan. Through the miracle of constant investments over those 25 years, only the first few dollar investments would be losses. The dollars invested 1930-1954 would largely be gains.

I'm deeply offended that my brilliant and insightful comment received no response.

I'm sorry, Grandpa.* ;-)

von

*No, Praktike ain't my grandad. To my knowledge, at least.

[Sebastian Holsclaw]

Which one was that? ;)

The hookers comment is of course a distillation of one of the general problems with social welfare programs.

[kenB]

praktike,

I would've responded, but I couldn't figure out which sort of wad you were referring to.

[Dantheman]

"No, Dan. Through the miracle of constant investments over those 25 years, only the first few dollar investments would be losses. The dollars invested 1930-1954 would largely be gains."

Taking a not-insignificant 15 year slice from your table 1929-1944, at the end of that period there would be substantial losses, as the earliest investments will have lost 50%+/-, and few if any will have any profits at all.

[rilkefan]

"There is no reason to believe that the future will significantly differ. Or, put another way, if the future does significantly differ, it won't much matter what we do to Social Security."

Well, the first sentence is just silly, but the second is an indication that this debate is a waste of time that could be spent on health care.

[votermom]

But the point of individual retirement accounts is to put worker's retirement funds in their hands, and to allow them to be (some for the first time) shareholders and owners of society. This is not merely about doing the financially prudent thing, but doing the financially empowering thing.

The problem with that is that the management fees for individual accounts will not be insignificant.

Nor do I agree that the Enron/Anderson scandal was an anomaly.

If we can agree that John Bogle may be someone who knows a bit about the market, indexing, and the importance of keeping costs down, here's two articles by him on the topic:
On Social Security in the 2000 election
On corporate governance post-Enron

[CharleyCarp]

Von's grandfather might well have been better off had he invested that money, instead of paying it as taxes. Then again he might not have, depending on exactly what he invested in, and what he did with the money when he retired.

It's academic, though, because there's another question one would still have to answer: Von's grandfather's money didn't get put into a hole in the ground somewhere, or an incinerator. It was used to pay the benefits of people who retired before he did.

This is a problem that won't go away, without the kind of radical departure that Sebastian is talking about (and the President is desperately trying to avoid talking about). My contribution pays for Von's grandfather. If I put that money into my 401k instead, and if the promise never to raise my taxes is kept, the money to pay Von's grandfather has to come from ___. The future? Mr. Ponzi? No, it has to come from a reduction in benefits payable to someone who paid in for maybe only 25 years, but who also invested prudently.

As I've said, I personally have no objection to a deal that allows means-testing -- but it would have to be unbreakable. Benefits that would be indexed to the economy, and could never be reduced below the agreed amount.

[Bernard Yomtov]

von,

I fear we are posting past each other (which I suppose is better than past-posting each other, but not much). I am not talking about a transition period. I am talking about a privatized system in steady state.

Today, Wanda Worker hands money to Robert Retiree. This is a transfer. Leaving the trust fund distraction aside, there is no net new investment.

Under a privatized system, Wanda would not hand money to Robert, she would invest it in the financial markets instead. How would Robert live? He would liquidate investments he made while working. There is no net new investment.

Imagine, if you will, Wanda handing cash over to Robert in exchange for his portfolio. That is effectively what happens, on an ongoing basis, in the privatized system. From a social point of view, this is no different than the transfer payment, except perhaps for having greater administrative costs.

[von]

Taking a not-insignificant 15 year slice from your table 1929-1944, at the end of that period there would be substantial losses, as the earliest investments will have lost 50%+/-, and few if any will have any profits at all.

O.K., Dan, if you count only 1929-1944 -- of which the first 11-or-so years encompassed the Great Depression and the last four-or-so-years encompassed WW2 -- you would not see decent returns. But any such combination of economic and other shocks would also have dire consequences for Social Security.

Well, the first sentence is just silly, but the second is an indication that this debate is a waste of time that could be spent on health care.

Which is only marginally better than the foregoing sentence, I suppose, which manages to be both silly and sophomoric.

I agree with two items, CharlieCarp: First, as I've mentioned, any privatization plan must be slowly phased in; second, means testing is an effective stopgap -- and better than nothing.

The problem with that is that the management fees for individual accounts will not be insignificant.

Note my proposal would include index funds as a primary component, which are extraordinarily low cost (and the Federal Government has the ability to police such accounts in ways unavailable to the private investor).

Nor do I agree that the Enron/Anderson scandal was an anomaly.

Well, then, I suggest that you pull all your money out of the market.

[hilzoy]

Well, what about my insightful comment? she sniffed.

[James B. Shearer]

Von claims there is no reason to expect future stock market returns to significantly differ from past returns. This is incorrect, current dividend yields are very low by historical standards and dividends were a large portion of the return in the past.

Stocks returned well in the past because people thought they were risky investments causing stocks to be priced cheaply. Now that many people have been convinced that stocks are a can't lose proposition stocks are priced much higher. This means expected returns from stocks are much lower than they used to be even if the economy performs as well for the next 100 years as it did for the last 100 years.

[Sebastian Holsclaw]

" If I put that money into my 401k instead, and if the promise never to raise my taxes is kept, the money to pay Von's grandfather has to come from ___."

That is why any solution is a long term solution. If I put my money into a 401k, we still have to do something for Von's grandfather. But my sister's children won't have to pay for me.

[Dantheman]

"O.K., Dan, if you count only 1929-1944 -- of which the first 11-or-so years encompassed the Great Depression and the last four-or-so-years encompassed WW2 -- you would not see decent returns. But any such combination of economic and other shocks would also have dire consequences for Social Security."

It would be useful to see where your chart came from. I suspect there are many other somewhat lengthy periods like that one. I had a summer job in 1980 in the Philadelphia Stock Exchange, and I recall traders wondering if we would ever reach a Dow of 1,000 again (it had passed that threshold in 1973, and did not cross it until 1982). Recognizing that stocks are nothing like a sure bet, in an era where we still made our Social Security payments to retirees, takes significant wind out of your sails, unless you still believe (as I mentioned in the first comment and you still haven't replied to) that the proper test for privatization is whether it "has the potential" to perform better than the current system.

[Edward]

Quick (between meetings) Question.

Will citizens have say over where the funds in these private accounts are spent?

That's really unclear to me.

[von]

Bernard, I'm trying to follow your argument, but I admit to having difficulty -- quite possibly because I'm an idiot. In hopes of clarifying matters.

I pay SS taxes of $5,449.80 per year. Assume that I also invested the maximum allowed for me in my 401(k)this year, which is $13,000.

We all agree, I assume, that the 5,449.80 that I paid to the SS fund is being (or soon will be) distributed to retirees in the form of SS benefit checks.

We also agree, I assume, that the $13,000 that we're assuming that I invested in my 401(k) includes actual investments in companies. The demand I expressed through those investments helped to support (or increase) the investee's stock prices and market capitalization, which increases the amount that the investees can borrow, allows those companies to raise additional funds through further stock distributions, enriches (or allows liquidity for, which can be equally important) the investors from whom I purchased the stock, and generally leads to greater flexibility and a range of business benefits.

At some point, under the present system, I will begin drawing SS payments. At some point, I am also likely to liquidate some or all of my 401(k); what does not get liquidated may be passed on to my inheritors (in some fashion).

Your position, as I understand it, is that my investments in my 401(k) plan are equivalent to my SS tax payments as an economic matter. Do I get you, or have I missed something?

von

p.s. IOW, I am proposing turning some of my $5,449.80 in SS taxes into the equivalent (or near-equivalent) of my 401(k) investments. I am exchanging a tax for an investment -- in a sense, I am replacing a part of SS with a coerced 401(k) plan. Now, we can discuss whether coerced 401(k) payments will be a partial substitute for voluntary 401(k) payments, thereby reducing the expected increase on the savings rate -- but, as I understand you, that's not your point.

p.p.s. If you're proposing some 45,000 foot, quasi-take on the Ricardian Equivalency Proposition, I'd suggest that you have too much faith in the REP's applicability.

[Sebastian Holsclaw]

"I recall traders wondering if we would ever reach a Dow of 1,000 again (it had passed that threshold in 1973, and did not cross it until 1982)."

This is something we need to talk about. We can't speak about such investments as if they all took place at the 1973 high and then cratered until 1982. Whatever investment system you end up with, it will have lots of small investments going in monthly. At some point in that 73-82 span, there were investments going in at the bottom of the cycle which were making huge profits as it ramped up toward 1982. In a long term system many profits would have been lost in 1973 which were not regained until 1982. But on average, in any long term investment period, the returns are excellent.

[Dantheman]

"Whatever investment system you end up with, it will have lots of small investments going in monthly. At some point in that 73-82 span, there were investments going in at the bottom of the cycle which were making huge profits as it ramped up toward 1982. In a long term system many profits would have been lost in 1973 which were not regained until 1982."

Agreed, although my recollection is that 1982 was near the bottom of that period, and then the market took off rapidly as we left the 1981-82 recession. That's why a broader table would be useful.

[von]

Ahh, sorry Hilzoy, missed it. You make a great comment regarding the deficit, and one with which I don't much disagree. I plan on discussing it in a future post.

It would be useful to see where your chart came from.

Click on the chart, Dan. It will take you to a webpage that will allow you to calculate your own chart, for whatever period you desire.

Will citizens have say over where the funds in these private accounts are spent?

Short answer to Ed's question: In general, yes, I'd like that.

Without agreeing with James Shearer's characterization of the market, he does make a good general: Past results do not guarantee future results. (Reading between the lines, I suspect Rilkefan was thinking of the same point in his one-off post, above.) This is, of course, correct in the broad sense that life is uncertain. However, the stock market has survived numerous structural changes in the past, and the rise of the investor class has generally been a net positive. It's true that we'll likely never see the returns of the 1990s again, but we are likely to see continued growth.

[von]

We can't speak about such investments as if they all took place at the 1973 high and then cratered until 1982.

The key concept, which you can apply in your every day investing, is "dollar cost averaging." You spread your stock purchases over a period of time in order to reduce your risk.

[felixrayman]

Even for the 30-year period from January 1, 1929 until January 1, 1959 -- a period that encompassed the Great Depression and a World War, among other things -- stocks were a good bet

Someone doesn't understand the concept of "inflation".

All forms of Social Security are risky.

Asinine. When the market tanked in 2000, those who were relying solely on Social Security to fund their retirement did not need to alter their plans one bit. Those relying on equities did - many of them had to reenter the job market. These situations are both "risky" in the way that London and Antarctica are both "cold".

A significant, long term market failure will cause a private system to fail, the current system to fail, and any conceivable new system to fail.

This is wrong in two ways - for one, the stock market is not the economy. When the NASDAQ declined by 80%, there was no significant decline in the ability of the government to fund entitlement programs. In a "conceivable new system" this would not be the case - that new system would be riskier.

Second, moving from defined benefit programs to a program based on investing in equities would make an "asteroid hit" more likely due to the increase in the variability of consumer spending of retirees. Under a system where a large number of retirees depended heavily on returns from equities for their income, a serious decline in the stock market would cause retirees (and this will be 1 person in 5 in the near future) to reduce their spending, which would cause the stock market to decline further as consumer spending shrank, which would cause retirees to cut spending further, etc. The current Social Security system, along with other New Deal programs (deposit insurance, etc.), is one reason the boom/bust cycle is less extreme than it once was.

[von]

Whoops, my apologies, Dan. The click-through feature didn't take. You can create your own chart here: http://www.globalfindata.com/

[Dantheman]

"Click on the chart, Dan. It will take you to a webpage that will allow you to calculate your own chart, for whatever period you desire."

It doesn't for me. I just get a larger version of the chart, which is labeled Photo -- Microsoft Internet Explorer. There no place to jump to another webpage.

[Sebastian Holsclaw]

"When the market tanked in 2000, those who were relying solely on Social Security to fund their retirement did not need to alter their plans one bit."

You are quick with the London-Antarctica analogy yet you make the same error. When people are talking about a bad economy making privatization a really bad deal, they mean a long term decline. A short-term down step isn't a big deal in that sense. If the market actually tanked over the long term, it would be because our economy was awful over the long term. Social Security as currently structured wouldn't survive that. And the political pressure of people who would rely on it if we don't tinker with it between now and then would makes steps to improve the economy very difficult at that point.

[von]

Someone doesn't understand the concept of "inflation".

Ahh. So your position is that, in real terms, a dollar invested in a market index in 1929 did not increase in value? Or do you not understand the concept of "answering the argument"?

FYI -- I have thought I had set the graph to record in constant 2004 dollars, but, looking at it, perhaps I did not. (Note that there was significant deflation in the 30s, so, if I failed to use real dollars, the figures shouldn't be affected much by inflation in the later years.) I'll see if I can figure it out.

[von]

Dan, see my 4:27 e-mail re: the chart.

[rilkefan]

SH: "And the political pressure of people who would rely on it if we don't tinker with it between now and then would makes steps to improve the economy very difficult at that point."

But health care would ruin the economy long before then, so why focus on second- or third-order issues?

von: "(Reading between the lines, I suspect Rilkefan was thinking of the same point in his one-off post, above.)"

Well yes, but really I was thinking of arguments from DeLong and Krugman about P/E ratios and "things that can't go on forever won't", health care, the deficit, the current admin., the aging of America, the lack of science/engineering focus here, the loss of bright students to the post-9/11 hassles/insanities (do not get me started about the brilliant minds turned away from our shores), and the lack of traction reality-based policy argument gets in this country.

[von]

FYI --

It looks like I did use real dollars for the chart -- or, due to the aforemention Great-Depression-era deflation, I can't notice the difference between an inflation-adjusted and non-inflation-adjusted chart.*

von

*That's one of the little known facts of the Great Depression: At certain points during the Great Depression, prices were falling at a rate of nearly 25% per year.

[Sebastian Holsclaw]

"But health care would ruin the economy long before then, so why focus on second- or third-order issues?"

Because many of the issues in dealing with Social Security are transferable, but easier to deal with in Social Security first. (Though not easy to deal with apparently).

[Jadegold]

One more time: SS is not a retirement or pension plan.

If you go the official SS website, they will tell you as much:

Social Security was never meant to be the sole source of income in retirement. It is often said that a comfortable retirement is based on a "three-legged stool" of Social Security, pensions and savings. American workers should be saving for their retirement on a personal basis and through employer-sponsored or other retirement plans.

And, once more, if we take Sebastian's rosy market forecasts--we easily see SS remains solvent as far as the eye can see. So, why on earth would we take a program that has worked for nearly 70+ years and is extremely popular and destroy it?

I don't know Von's grandfather; at least he has the good fortune of a family willing and able to help him out. But I'd ask all those contemplating destroying SS to consider the fact there are many elderly Americans who don't have family or don't have family with the wherewithal to help out. For them, SS may be the difference between living a meager but dignified existence and living out on the street.

[felixrayman]

A short-term down step isn't a big deal in that sense.

It was a big deal for people who were depending on equity returns - many of them had to return to work or postpone retirement. Those depending on defined benefit contributions faced no such risk.

If the market actually tanked over the long term, it would be because our economy was awful over the long term. Social Security as currently structured wouldn't survive that.

First of all, your argument is false - markets can tank for reasons that have little to do with the underlying economy. Second, even if your premise was true, your conclusion would be false. Consider the example of Japan, where the stock market declined by 2/3 and was still at that level 8 years later. The welfare system in that country survived, one based on equity returns would not have. The system based on equity returns would have been much riskier.

All Social Security systems are not equally risky. That is nonsense. Returns on equities are high for one reason and one reason only - risk.

To claim that we should shift risk to individual retirees is a policy decision - one I find reprehensible, but a policy decision nonetheless. To deny the risk exists is absurd.

[Bernard Yomtov]

von,

If you had seen my student ratings during my mercifully brief teaching career you would be reassured that your failure to follow my argument was not due to idiocy on your part.

If I understand your claim, it is that coercing everyone into quasi-401(k)'s in lieu of SS will result in a new, continuing, flow of money into the financial markets, and consequent benefits for the economy as a whole. I do not think this is so. Ricardian equivalence has nothing to do with it.

Your view of what happens over the course of your life is accurate. But I am not talking about what happens over the course of your life. I am looking at the system in cross-section, so to speak, at events happening simultaneously. Under a privatized system, while you are putting money onto the market, others are taking it out.

It is true that under the current system payroll taxes do not increase investment, but are handed off to retirees. But neither does the payment of benefits reduce investment.

Under the privatized system payroll taxes would indeed increase investment, but "benefit payments" (actually the liquidation of assets held in private accounts) would reduce investment. At the same moment that workers are doing all the wonderful things you describe by investing for their retirement, retirees are undoing them by selling off their investments. Does that make sense?

[kenB]

For them, SS may be the difference between living a meager but dignified existence and living out on the street.

So why not make it a real safety net for those who need it instead of a mandatory quasi-pension quasi-Ponzi scheme? Setting aside transition issues, it seems to me that we should either have a welfare program for seniors funded by a general tax, or government-sponsored IRAs of some sort, or both as separate programs. What we've got is a muddle.

[von]

Bernard, I understand you now, and -- though there're a few issues that I have with your analysis and presumptions -- let me try to address your argument on its own terms. Assuming everything that you say is true, it is only true if the amount of money flowing out of the system (in liquidations) exceeds the amount of money being invested in the syste. Correct?

[von]

Exactly, KenB. Means test for a start. Eventually, however, we should have a two-tiered system: an investment savings program to help fund retirement for the vast majority, and a welfare program to provide for the needy.

[felixrayman]

a mandatory quasi-pension quasi-Ponzi scheme

If Ponzi had been able to keep a scheme going for 75 years, and at that point the scheme could be maintained for another 75 years with minor adjustments, you would have never heard the name Ponzi before.

Social Security is not a Ponzi scheme, quasi or otherwise. If it is a "muddle", it is a muddle that has nearly eliminated poverty among the elderly. Why not find something to fix that is actually broken to start out with?

Health care for example - we know that other countries are able to achieve higher life expectancies and lower infant mortality while spending far less per capita than the US on health care, even after the amount US corporations spend on R&D is taken into account. What kind of systems do they use to do it?

[Jadegold]

So why not make it a real safety net for those who need it instead of a mandatory quasi-pension quasi-Ponzi scheme?

If you consider US Treasury Bonds part of a Ponzi scheme, we have far bigger problems than SS. Frankly, those worried that gold coins aren't being tucked away in a mattress in a vault somewhere don't live in the real world of finance. At the very least, they don't understand what a Ponzi scheme is.

Now, if you're looking for a retirement plan over and above SS--fine. President Gore proposed just such a plan back in 2000; tax-free, voluntary accounts on top of SS that would be matched by the Govt. for households earning less than $100K annually.

[felixrayman]

Eventually, however, we should have a two-tiered system: an investment savings program to help fund retirement

Its called a "401k".

[Sebastian Holsclaw]

"If you consider US Treasury Bonds part of a Ponzi scheme, we have far bigger problems than SS."

Argh. Loans to someone else can be an investment if they are solvent. Loans to yourself are not an investment. US treasury bonds when held by the US are not investments.

[Jadegold]

Argh. Loans to someone else can be an investment if they are solvent. Loans to yourself are not an investment. US treasury bonds when held by the US are not investments.

Let's pursue this. Are you stating US Treasury Bonds are worthless and/or don't earn interest?

[Katherine]

this is all lovely but how do you pay for transition costs? I mean, if you could use magic leprechaun gold to pay current retirees benefits you could do a lot of things--with the money going towards individual accounts you could simply institute a payroll tax holiday that let everyone add to their 401Ks, too. If you want to increase the payroll tax to pay the transition costs, okay, but you'd better do it in a more progressive way than the payroll tax works now or you'll have people in real danger of losing their homes or their health care. But if you don't find any money under a mattress and you aren't willing to raise taxes, then you are going to have to borrow even more, which is not a real good option at this point, or cut benefits for current retirees or people planning to retire in the next few decades who have paid into this system and counted on it being there for them for their whole adult lives.

we had a surplus that you could have used for such a purpose once upon a time--though I think there were better ways to use it. But it's a fading memory.

[radish]

Wow. Very thought provoking, and not in a good way.

Imagine your grandpa working full time at minimum wage, von. He's making half of that inadequate pension. Your grandpa could work fifty, maybe even sixty hours a week at WalMart with no vacations and gross less than a $19k pension, to say nothing of net. Imagine your grandpa doing that...

And you know how much grandpa likes roast beef. He used to have it for lunch every day when he was working. He still loves it but he's nervous about mad cow disease. He talks to his friend the rancher about it, and his friend the rancher tells him that he (the friend) wants to test his downer cows for BSE but he can't, because it's illegal. It's illegal to for the friend to test his own cows. Chew on that. Your grandpa switches to organic roast beef but he can only afford it every couple of months on his pension...

Now imagine your grandpa joining the National Guard as an MP in 2001. Pay's a lot better, but he's in Iraq watching his friends' arms and legs get blown off. His armor is inadequate, his mission unclear, and his morale low. When he comes back (if he comes back) he's liable to be unemployed, because his (industrial-sector) employer has gone out of business. He gets a job at WalMart instead, and works 60-hour weeks in order to make what would have been his pension amount...

In Iraq grandpa made friends with an Iraqi cop named Salim, who eventually manages to emigrate to the US. One day grandpa disappears. For some reason the Sheriff punts, and a guy from the FBI shows up. The guy from the FBI is strangely unhelpful, grilling you instead about Salim, who you can't get hold of either. Eventually you adjust, and move on with your life...

Are you actually hearing yourself von (and others)? All the careful and extensive consideration you're giving to this issue that everyone agrees isn't exactly an emergency? All the thoughtful yet disputatious wonkery about whether (and under exactly what circumstances) past performance is a guarantee (or a near-guarantee) of future results? Did you do your own triage or did somebody pick your battle for you, with stirring rhetoric, evocative music and flashy graphics and a catchy storyline? Can you get in front the mirror (literally), look yourself in the eye, and tell yourself that you'd still be thinking about SS if you were doing your own triage?

YMMV, but when I get played for a sucker I like to admit it at the earliest opportunity, no matter how embarassing. My own experience (extensive) is that the more I keep hoping that it's gonna be easier to back down later, the longer I remain a sucker and the more embarassing it ultimately is.

[Bernard Yomtov]

Assuming everything that you say is true, it is only true if the amount of money flowing out of the system (in liquidations) exceeds the amount of money being invested in the syste. Correct?

Or if liquidations and investments are equal.

But note that by ignoring the trust fund issues and treating SS as a direct transfer we are implicitly assuming that they are equal.

Even in the current system, to the extent we accumulate surpluses these represent new investment. True, they are loaned to the Treasury and not invested privately, but if they were invested privately then someone who now holds private securities would be holding treasuries instead, since the Treasury has to borrow the money somewhere. Of course, you can argue that without the SS surplus the rest of the government would be more prudent fiscally, but that is pure conjecture.

[von]

Let's pursue this. Are you stating US Treasury Bonds are worthless and/or don't earn interest?

No, he's saying that regardless of the inherent qualities of U.S. Treasury bond, a loan from me to me is not a loan. It's an accounting trick.

[meaux]

Three benefits to switching to a "privatized" DC plan:

1) Eliminate future shortfall in defined benefit program
2) Efficient allocation of deferred-tax investment dollars
3) Ownership and personal control over one's retirement money has appeal to the spirit of American individualism.

Three Disadvantages:

1) Current DB system needs to be financed today, so in the short term we need to find money to pay off current retirees while those receipts that would otherwise fund their current benefits are being invested for the eventual benefit of the current taxpayers. (Is this a fair summary of transition costs?)
2) Individual accounts are less efficient than a large asset pool (the point Bogle makes in Votermom's link) and retail-level money management fees will consume a significant portion of the returns on assets.
3) Some individuals (or possibly all individuals) will make bad decisions or suffer bad consequences on the negative tail of the investment return bell curve, leading to returns significantly lower than the benefits they would reap under the old system.

Are there advantages/disadvantages I'm missing? Because it seems like the only "clash" in this debate is on the relative significance of these six points.

Also, Votermom brings up a permutation (also advocated by Bogle): Invest SS in the market more broadly. This allows realization of benefit (2), potentially addressing benefit (1) at the cost of a little exposure to disadvantage (3) in the case of an asteroid strike-level event. Von counters that this option lacks benefit (3).

If there is more to the debate outside of hyperbole, I'd like to understand it.

[Sebastian Holsclaw]

"Let's pursue this. Are you stating US Treasury Bonds are worthless and/or don't earn interest?"

Nope. They are worth a lot to entities that aren't part of the US Government. And what is this 'earn interest'? Where does the interest come from? From taxpayers. The government can't pay interest to itself and create money out of thin air. (Unless we are talking about intentional inflation, but that doesn't help economies it hurts them.)

[Jadegold]

No, he's saying that regardless of the inherent qualities of U.S. Treasury bond, a loan from me to me is not a loan. It's an accounting trick.

Hardly. For one thing, it's not a "loan from me to me" as you characterize it. For another thing, if you're against 'pay as you go' financing and accounting, you must also be against most forms of insurance.

They are worth a lot to entities that aren't part of the US Government. And what is this 'earn interest'? Where does the interest come from? From taxpayers.

I see. So, we're compelling taxpayers to purchase securities which accrue interest also paid by forcing taxpayers to fund these interest payments. Right?

[hilzoy]

Seb: just to rehash previous exchanges: either (a) the Social security Trust Fund is part of the General Fund (not true, but I guess you could say that it might as well be, if you wanted to.) In this case, there is no 'social Security crisis', only a general funds crisis, which there are many better ways to address. Or (b) the SSTF is not part of the General Fund, in which case the bonds that it owns, and the interest it does in fact receive, will keep Social Security solvent for the next thirty or forty years, using very conservative assumptions about productivity growth. In no case it there a crisis that needs fixing now.

A few other points: first, we should recall the pervious fix for Social Security, which gave rise to this debate. At that time, we (as a nation) decided to prepare for the retirement of the baby boomers by doing the sensible thing: raising payroll taxes and accruing a surplus so that social security would have adequate funding when the baby boomers retired. We could have done various things with this surplus: invested it in the market, for instance. But we thought that would invite political meddling with markets, so instead we just bought US government bonds. Until conservatives invented the clever idea that these bonds did not actually have to be repaid, people like, oh, me, assumed that this was just a conservative investment choice, not a decision to hand the entire surplus over to the general fund instead of prefunding Social Security. To me, the idea of pretending that it has all been the General Fund all along, really, and can therefore be assumed not to exist is just a way of stealing the Social Security Trust Fund, and really makes me wish we had used the money to buy other countries' bonds instead, so that we wouldn't be having this argument.

I should also note that there is absolutely no way that Democrats would have signed on to the hike in payroll taxes had we been told at the time that as soon as the Trust Fund stopped being available to hide the extent of deficits, it would be declared to be a mere accounting fiction. The payroll tax is an OK, though (in my view) non-ideal way to fund Social Security. It is a horribly regressive way to fund general government expenditures. We accepted it as a way to fund Social Security, but would never have accepted it as a substitute for e.g. higher but fairer income taxes that produced the same amount of revenue.

Third, the reason we have a problem with the General Fund is because of the reckless and irresponsible fiscal policies of Republican presidents, starting with Reagan and ending with George W. Bush. If we are going to view the Trust Fund as part of the General Fund, then we need to see our fiscal problems not as problems with Social Security, but as a general problem with the balance of income and expenditures, which might be solved by generating more income, or by reducing expenditures. And I see no reason at all why the response to this should be dismantling one of the most successful government programs ever, which has come close to eliminating poverty for a group of people who cannot just go out and get a job, instead of repealing Bush's irresponsible tax cuts.

[LizardBreath]

How would you feel about "saving Social Security" by selling the bonds in the trust fund to third parties? The trust fund can buy real estate or something with the money it gets for its treasury bonds, and sell it off as necessary to fund the payment of benefits. Because the bonds are held by third parties, the government generally is now obliged to regard them as valid obligations, and must pay them off like any other bond. What's the problem?

Now (and this is the clever bit), how about we don't bother, and simply regard the treasury bonds held in the Social Security trust fund as valid obligations (check this bit out) without passing them through a straw man purchaser? Social Security is saved! The general fund has a problem due to Bush's out of control deficit spending, but it isn't a Social Security problem.

Seriously, there is nothing incoherent or unusual about one part of an organization owing money to another part of the same organization, and even paying interest on those loans. I'm a commercial litigator, and corporations do this constantly -- a parent lends money to a wholly owned subsidiary, one subsidiary lends money to another -- and paying interest on such loans isn't creating money out of nothing, it's paying interest in exactly the same manner any entity pays interest on a loan from any other entity. Treating such a loan as anything but a real obligation, despite the fact that it is a loan from one corporation to another with precisely the same ultimate ownership, is often a sign of serious corporate wrongdoing.

[Sebastian Holsclaw]

"So, we're compelling taxpayers to purchase securities which accrue interest also paid by forcing taxpayers to fund these interest payments. Right?"

Under which system?

We could have done various things with this surplus: invested it in the market, for instance. But we thought that would invite political meddling with markets, so instead we just bought US government bonds. Until conservatives invented the clever idea that these bonds did not actually have to be repaid, people like, oh, me, assumed that this was just a conservative investment choice, not a decision to hand the entire surplus over to the general fund instead of prefunding Social Security. To me, the idea of pretending that it has all been the General Fund all along, really, and can therefore be assumed not to exist is just a way of stealing the Social Security Trust Fund, and really makes me wish we had used the money to buy other countries' bonds instead, so that we wouldn't be having this argument.

This argument would have made sense if the money being raised was not being used as cash support for the general fund. It was in fact used that way, so the accounting fiction is what it is. Complaining about the unfairness of it doesn't help. And yes, buying other people's bonds would have made it a different story, unless they decided not to repay us.

We accepted it as a way to fund Social Security, but would never have accepted it as a substitute for e.g. higher but fairer income taxes that produced the same amount of revenue.

Payroll taxes had jumped to as high as 9% by 1972.

If we are going to view the Trust Fund as part of the General Fund, then we need to see our fiscal problems not as problems with Social Security, but as a general problem with the balance of income and expenditures, which might be solved by generating more income, or by reducing expenditures. And I see no reason at all why the response to this should be dismantling one of the most successful government programs ever, which has come close to eliminating poverty for a group of people who cannot just go out and get a job, instead of repealing Bush's irresponsible tax cuts.

Succesful at what? Taking money from working class people and redistributing to older people regardless of wealth. Quite. Is that fair? Hardly. And sure, lets talk about cutting funding all over the place. I'm all for that. Let's focus on real federal priorities like defense rather than more state-like social programs. But that is a policy decision.

All of this is a direct result of the Democratic Party propaganda that Social Security was a retirement fund. It isn't, and misperceptions have flowed from that.

Lizardbreath, the problem is funding the repayment no matter who owns it, correct?

Zero strawmen or five hundred it is the US taxpayer who pays. Which is why it was never, ever an investment.

[J. Michael Neal]

However, the stock market has survived numerous structural changes in the past, and the rise of the investor class has generally been a net positive. It's true that we'll likely never see the returns of the 1990s again, but we are likely to see continued growth.

Yes, we are likely to see continued growth. However, there is a lot of evidence that the risk premium isn't going to be as high going forward as it has been historically. In simple terms, you can see it in the P/E ratios. Even at the trough of the bear market, they were quite high by historical standards. Quite simply, the spread between the risk-free rate and the return on equities is unlikely to be as great in the future as it was in the past. It also means that the amount of risk contained in equities will be greater.

Will equities return at a higher rate than Treasuries? Almost certainly, but using the historical rate for the spread as your assumption for the future risk premium would be foolish. And the price of that premium will be higher.

It's funny how the advocates of privatization start their argument by saying that the future won't be like the past, and end it with saying that it will be like the past.

[J. Michael Neal]

This argument would have made sense if the money being raised was not being used as cash support for the general fund. It was in fact used that way, so the accounting fiction is what it is. Complaining about the unfairness of it doesn't help. And yes, buying other people's bonds would have made it a different story, unless they decided not to repay us.

Sebastian's incessent arguments that a loan to yourself can't be an investment is silly in the case of this situation. Clearly, it can be.

First off, if one is looking at this from the point of view of the Socal Security trust fund, they can be, since it is nominally seperate from the general fund. If social Security is a seperate entity, as it was set up to be, then there is no loan from one hand to the other.

However, the basic point remains true even on a broader basis. These bonds can be considered an investment, since, if Social Security hadn't been buying them, the government would have had to sell them to someone else. *Not* having the trust fund wouldn't have relieved the general fund of any future interest obligations.

[J. Michael Neal]

Hit Post too soon.

In fact, the presence of the Social Security trust fund likely has saved the general fund significant sums of money over its existence. For one, reasonable projections suggest that the general fund will never have to pay off the principal on the bonds in the trust fund, thus saving it a huge chunk of change in the long run versus having sold the bonds to the public.

The other is that the general fund would likely have had to sell those bonds at higher interest rates if they had been sold at auction.

[felixrayman]

Loans to someone else can be an investment if they are solvent. Loans to yourself are not an investment. US treasury bonds when held by the US are not investments.

I don't know where you picked up the term "investment" from the post you replied to - the correct term here is "asset". Loans to yourself are an asset when those loans can be sold in open markets. The US Treasury bonds in the Social Security trust fund are assets. They can be sold and the proceeds used to buy whatever other asset you would consider an "investment". There is only one accounting fiction here - yours.

Taking money from working class people and redistributing to older people regardless of wealth. Quite. Is that fair?

Given that those same working class people have had, over the last 75 years, their probability of being impoverished should they live to old age reduced from "likely" to "negligible", the answer you are looking for is "certainly".

the problem is funding the repayment no matter who owns it, correct?

Incorrect, the problem is that George Bush and a Republican Congress have committed fiscal malpractice over the last four years, and conservatives in America have been too unprincipled to do anything about it. Were Social Security and the taxes that fund it to disappear tomorrow, that problem would be more severe than it is now.

[kenB]

I find this sort of discussion frustrating, because people are variously talking about the ideal, the practical, and the political, and many of the disagreements stem from people mixing up these domains.

My preference is to start with the ideal: if you were going to create a "social security" system starting from scratch, what would it look like? For those who are defending the current system, are you saying that it's designed exactly the way it should be?

Whether the current system is the best we can realistically hope for, or whether it's good enough and the transition costs to a superior system outweigh the potential benefits, are separate questions, though entirely worth discussing. Whether it needs to be changed immediately because it's "in crisis" is another separate practical question, though not strictly relevant to the original post.

I suspect that being careful to specify which of these questions we're attempting to answer would lead to more fruitful exchanges.

[felixrayman]

if you were going to create a "social security" system starting from scratch, what would it look like?

1) 0% poverty rate for senior citizens and the disabled. <-- most important
2) 100% participation on both the payment and benefit ends.
3) Achieved through progressive taxation.
4) Low administrative costs.
5) Predictable defined benefits for benificiaries.

The current system scores fairly well on 1, 2, 4, and 5. I would love to see the income limit on SS payroll taxes scrapped, which would make some progress towards 3.

Privatization would be worse than the status quo for goal 1, no difference on 2 and 3, and would be worse on goal 4 (for example, in Chile which has a semi-privatized SS system, 25% (!) of contributions go towards administrative costs), and worse on goal 5.

If you've got ideas other than the current system that meet the specs, let's hear them.

Whether it needs to be changed immediately because it's "in crisis" is another separate practical question

In the same way that "is the earth flat or round" is a practical question, I guess. Those who assert that Social Security is "in crisis" are simply being dishonest. There is no room for sensible discussion there, because those making such assertions have abandoned sensible discussion for ideologically motivated deception.

[Sebastian Holsclaw]

I don't know where you picked up the term "investment" from the post you replied to - the correct term here is "asset". Loans to yourself are an asset when those loans can be sold in open markets. The US Treasury bonds in the Social Security trust fund are assets. They can be sold and the proceeds used to buy whatever other asset you would consider an "investment". There is only one accounting fiction here - yours.

Sorry, but you are wrong. A piece of paper you write to yourself saying "I owe ME $1,000" is not an asset for you. If you sold it to someone else the proper term for it vis-a-vis yourself would be 'liability'. That piece of paper if held by someone else would be an asset, assuming you were solvent. Please notice the 'assuming you were solvent'. The value of the asset to them would be equal to the detriment of the liability to you. If you are both the asset holder and the liability holder the net value of the piece of paper is zero. Hence--accounting fiction.

[Nat]

You buy stock via a brokerage who referees the transaction with another individual or an institution. Buying stock does not build a damn thing other than a new pool in your broker's back yard. The money does not go to the company unless it is some sort of private placement or IPO. And I am sorry, not a single privatized penny of Social Security will ever purchase a single share of a hot IPO.

What a joke.

And I am waiting for someone to do a statistical breakdown of where these gains (or losses) go by decile. If the market averages 6% over the long haul some beat that number and some don't. Joe six-pack does not beat that number. The old money with 7 and 8 figure accounts at the big brokerages houses beat the number. Tell me what the bottom 30% of investors (tens of millions of retirees) can expect as a return on their investment in the ownership society? Or are all our small dollar investors going to be above average?

[rilkefan]

don't know if this works...

stop looking ugly?

[felixrayman]

That piece of paper if held by someone else would be an asset, assuming you were solvent.

So, it would be an asset if it was not held by the Social Security trust fund, but it is not an asset when it is? The magic of alchemy! Please describe for me the balance sheet transaction (from the perspective of the Social Security trust fund) that would occur when the Social Security trust fund traded $100 worth of bonds for $100 worth of gold. Would this gold show up on the books of the trust fund as an asset, or as a liability?

US taxpayers are on the hook for the fiscal irresponsibility of the current administration - for which you are an ideological apologist. This has nothing to do with Social Security - of which you are a self-admitted ideological opponent. The assets the Social Security trust fund holds are real assets - a liability can not be traded for gold, a US Treasury bond can.

When someone is making an argument that implies gold is a liability, it is completely obvious where the accounting fiction lies.

[CaseyL]

Nat brings up an important point: stock is not liquid. You buy stock in the hopes that you'll be able to sell it at a profit later, or to borrow against it.

I have held 50 shares of AT&T since my grandmother gave them to me over 30 years ago. In that time, the value of the initial stock has plummeted; has given me "free" shares in companies that spun off from AT&T (none of which have prospered, long-term; including, esp., Lucent); and has semi-split into 75 shares only to then reverse-split into 10 shares.

Overall profit: $360, which I got only because AT&T Wireless unilaterally "bought out" its shareholders when it was acquired.

Dividends? Those have averaged $2.00 per quarter, which adds up to a lordly $240 over the past 30 years. And AT&T is one of the very few companies that even still pays dividends.

Multiply this by 20 - assuming I held a more respectable 1000 shares - and those dividends would come to $4800. Over a 30 year period. Oh, what wealth!

SocSec is not a get-rich investment program. It's not meant to be. It's a *safety net* program; intended, from the start, to simply ensure that old people (and disabled people) aren't sleeping in cardboard boxes and eating out of dumpsters. It is premised on the concept of "pay forward," a *social contract* between generations: we pay to support current benefits, the next generation pays to support ours, and so on.

The GOP has waged war over the past 20 years on the very concepts of "social contract" and "safety net." They've pretty much won the war, too. The agenda and issue framing now belong to feral predators, who would feel perfectly at ease in a Stone Age culture where the poor, elderly and disabled were sent out to die.

[LizardBreath]

Lizardbreath, the problem is funding the repayment no matter who owns it, correct?

No. No. No. 'The problem' is not funding the payment of Social Security benefits, in any sense different than 'the problem' is how to pay for the deployment of a non-working missile defense system, or 'the problem' is how to pay for the insane tax cuts passed by this administration.

'The problem' is how will the US government generally meet its obligations generally, given that the policies of the current administration have created massive structural deficits. This is not a problem to which the only, or even an obvious, solution is to introduce risk into a program whose purpose, which has been a spectacular success, is to shelter retirees from risk, or to dismantle that program. Unless, of course, you disapprove of that purpose.

The problem is that

[John Kelsey]

It seems to me that there's one overriding problem with Social Security as it's defined now, which is that it's a transfer of wealth from young to old without regard for making sure the old people need the money, or the young people have the money to spare.

We don't want old people sleeping in cardboard boxes on the streets, but that's just an extension of the more general principle: We don't want people sleeping in cardboard boxes on the streets. That is, in Felixrayman's post, he listed one of the priorities as a 0% poverty rate for elderly and disabled people, but surely our goal is a 0% poverty rate overall. Surely children being raised by single mothers need to be kept from poverty at least as badly as retired people. But one group is a lot more likely to vote than the other, with predictable results....

--John

[LizardBreath]

Sure, but that's an argument for increasing the scope of social welfare programs generally. It isn't an identification of a problem with Social Security.

[CaseyL]

John: I fail to see how saying "old people shouldn't have to live in cardboard boxes on the streets" can be construed to mean "...but we're okay with non-old people living in cardboard boxes."

I'm also not sure how dismantling SocSec helps the poor. Quite the opposite, I gather: what meager monies working class people have to invest will be targeted by predatory investment firms anxious to herd them into dubious investments, while reaping up to 15% of the funds in service fees and commissions.

And, finally, I would be interested in hearing how paying into SocSec impoverishes people.

[Nicholas Weininger]

LizardBreath, you're right that the real problem is the general fund imbalance, which is huge. Unfortunately, the "there is no crisis" crowd continues to claim that SS can somehow be regarded as separate from the general fund, despite the facts that

(a) the SS payroll tax surpluses of the past two decades have been used to offset general fund deficits

(b) the vaunted "trust fund" consists entirely of claims on future general fund revenues (that's all a government bond is: a claim on future tax receipts).

Now, clearly, to resolve this imbalance there will have to be substantial tax increases and/or substantial spending cuts. If you favor the latter over the former, SS is an excellent place to look for cuts, since first of all it constitutes such an enormous share of total federal spending, and second of all most people's benefits could be cut quite a lot without any increase in the number of folks sleeping in cardboard boxes.

Certainly the argument over privatization of one sort or another (and there are a *lot* of possible sorts) is different from the argument over whether and how to cut benefits. It is also true that there are some pro-privatizers who claim that privatization will fix the problem without spending increases or benefit cuts. They are no less dishonest than the "there is no crisis" people; they're like the diet hucksters who tell you you can lose weight without eating less or exercising.

For another excellent take on this see:

http://www.willwilkinson.net/flybottle/archives/2004/12/social_security.html

[Jadegold]

Once more, the so-called 'libertarians' from Cato are heard from. Again, they try to flog the myth that since gold coins and other shiny objects aren't actually kept in a numbered and labelled mattress in a vault somewhere--there really isn't a trust fund.

In the 'libertarian' world, people aren't really getting SS checks; after all, the Trust Fund doesn't exist. It's all a myth.

[felixrayman]

the vaunted "trust fund" consists entirely of claims on future general fund revenues (that's all a government bond is: a claim on future tax receipts).

Again, the trust fund could sell those bonds on the open market at any time, and use the proceeds to buy, say, gold. In other words, the trust fund holds real tangible assets, and with those assets (paid for by the SS payroll tax) Social Security is in perfect shape for more than 50 years using conservative assumptions, or forever using the assumptions being used by the proponents of privatization. Social Security is not broken. It does not need to be fixed. The general budget is broken. It needs to be fixed. US health care is broken. It needs to be fixed.

If it is your assertion that you want the government to appropriate those assets in the Social Security trust fund and use them to fund other parts of government, I would say you have a problem with deficit spending infinitely more serious than the (non-existent) problems with Social Security.

Now, clearly, to resolve this imbalance there will have to be substantial tax increases and/or substantial spending cuts

The imbalance is not in Social Security. Social Security takes in more money than it pays out. Thats where the money comes from to buy the bonds in the Social Security trust fund. The imbalance is in the rest of the budget, and it is there due to fiscal malfeasance by the current administration. Were Social Security, and the payroll tax that funds it, to disappear the budget deficit would be worse than it currently is.

What you are really talking about here is appropriating funds earmarked for the elderly and the disabled and using them to fund tax cuts for the rich. That's dishonest and wrong.

[Bernard Yomtov]

CaseyL,

Stocks, at least those of public companies, are very definitely liquid. It takes about 30 seconds or less to convert them to cash.

Nicholas,

Unfortunately, the "there is no crisis" crowd continues to claim that SS can somehow be regarded as separate from the general fund,

The claim is that the Social Security system, viewed as an entity, is not in crisis. That is absolutely true. The source of the problem is the fear that the government will not be able to meet its obligations to Social Security. (I hesitate to use the phrase "trust fund" fo fear of inciting another 2000 comments about its existence or non-existence). In that sense there is no more a "Social Security crisis" than there is a "defense crisis" or a "Dept of Agriculture" crisis.

The issue is that theBush Administration, having irresponsibly created the general fund crisis, now seeks to solve it, partly, by fooling around with Social Security. To do this they are making the dishonest claim that SS, in and of itself, is in crisis. It is necessary to refute this.

Changes may be justified, but when the Administration bases its proposals on patent falsehoods it is impossible to be receptive.

[felixrayman]

That is, in Felixrayman's post, he listed one of the priorities as a 0% poverty rate for elderly and disabled people, but surely our goal is a 0% poverty rate overall.

What was requested was what an ideal social security system would look like. Reducing poverty among those in the workforce falls outside the social security system. Increasing the minimum wage until it begins to cause unemployment would be a good start in that area.